Ed Zimmerman: ‘I Got Debts No Honest Man Can Pay’

I tried searching for the origin of this quote but couldn’t find it. I think novelist Daniel Defoe said something about honesty and debt repayment, though he was in no position to prescribe either. He’d been imprisoned and later, among other misdeeds, earned his release (and repayment of some of his debts) by agreeing to spy on behalf of his political adversaries. I checked Will Rogers, Benjamin Franklin (not quite), the bible (close), and revisited the advice that Shakespearean character Polonius gave to his son Laertes in Hamlet (to not borrow or lend, clearly wrong both substantively and as to the source of my quote). So for now I’m concluding (until someone unclogs my dim memory) that I just heard it hundreds of times from my dad who knew lots more about debts than he did about making money. He always, to my knowledge, repaid his debts. And that’s where my advice begins.

Startup founders often believe that risk should be shared. Articulating this belief in advance of incurring financial obligations is a perfectly fine thing to do. The counterparty, whether it’s the startup’s landlord or developer, can say yes, no or how about this instead. The founder and that counterparty can make an informed decision. Too many founders, however, either have this conversation and ignore the outcome (no thanks, cash is king, let’s just pay as you go) or fail to have the conversation and incur financial obligations that only the founder believes are contingent on subsequent startup funding.

Here’s the result: People who work with the founder get left holding the bag. Often these debts get retraded at funding anyway because the founder has subscribed to the theory that “when we close funding, we’ll have plenty to pay the tab.”
What founders miss is that you’re building both relationships and reputation, and that means credit history and managing expectations around simple vendor transactions. If you do a startup and end up with half a dozen different creditors, each of whom are, at the end of the period, owed between a few thousand dollars and five or six figures, you’ve now put the startup under real pressure to repay those creditors, and that impacts decisions you make and how you and your team members will have to handle many situations. Also, whether things work out or not, these creditors will remember having felt mistreated.

I want to draw an enormous distinction between three situations: (1) The startup incurs financial obligations, believing it will pay as the obligations come due, and something the startup didn’t reasonably expect later happens to make repayment difficult, (2) the startup has a handshake (even if not in writing) to repay obligations if, and only if, funding comes, or the obligations are partially at risk and this understanding precedes incurring the obligation, and (3) the startup incurs the obligation, believing that the counterparty expects timely repayment but the startup intends — and fails to communicate – that payment of all or most of that obligation only happens if and when angel or venture funding closes.

Mirrorpix/Courtesy Everett Collection

Bruce Springsteen performing at the Stadium of Light in the United Kingdom in June 2012.

The first two situations are fine, assuming the startup communicates effectively and rapidly. (See for my prior piece advising that bad news isn’t wine; it doesn’t get better with age!). That third scenario, however, represents misspent capital. The capital I’m referencing isn’t cash, it’s reputation, and while scrappy startups have to preserve cash, they really can’t afford to squander reputational capital. Your credit history is part of that.

There’s a wonderfully depressing song by Bruce Springsteen in which he says (on behalf of the protagonist): “I got debts no honest man can pay.” Sometimes people find themselves buried under crushing debt, and sometimes people take big gambles that pay off. Startup founders have to gamble. It’s even fine for startup founders to gamble with OPM (other people’s money), but they must have made good disclosure to the people whose money they’re using.

This also applies to the way startups treat team members. For instance, I’ve seen founders who’ve convinced people to join their startup only to have overestimated their startup’s ability to make payroll over the next several months. People definitely have long memories for these kinds of mismanaged expectations.

If you can’t convince vendors, developers, employees or others to knowingly share the risk, don’t compel them to unknowingly participate or you’ll end up with “debts that no honest man can pay” — and that depletes reputational capital.

Then again, this advice really stems from guidance my dad gave me and he really never did figure out how to make money. Of course, I don’t know anyone who thought my dad was dishonest. I guess it’s just a question of what you value.

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For aspiring or actual entrepreneurs, The Accelerators is an online archive of discussion among startup mentors– entrepreneurs, angel investors and venture capitalists. Although the blog is no longer being updated, its content lives here and you can see an archive of its tweets through June 2015 @wsjstartup.